COLLEGE SAVINGS 101

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529 E-ditorials

It must be they are running out of room in Washington for more monuments, and so they're turning to the tax code. First, Sen. William Roth has an IRA named after him. Then Rep. Bill Archer gets his name attached to medical savings accounts. And now, one year after the death of Sen. Paul Coverdell, President Bush signs a bill to rename the Education IRA as the "Coverdell Education Savings Account".

Coverdell (R-GA) was a leading proponent of many of the changes made to the "ESA" by the new tax law, most notably the expansion of "qualified expenses" to include elementary and secondary school expenses. (Most people think only those families sending their kids to private school can benefit from this. But that's not so. I can come up with plenty of qualifying costs for my kid in public school.) Other changes made by the 2001 Tax Relief Act include an increase in the annual contribution cap from $500 to $2,000 and elimination of certain traps for families who also use 529 plans or claim a Hope or Lifetime Learning credit. The old EIRA was weak and penalty-prone. The new ESA will be much, much better once the changes take effect in 2002.

With all due respect to the late Senator, however, I think that Messrs. Bill Gates, Steve Case, and Michael Dell should also have their names attached to the new ESA. After all, they must have had something to do with the rule in the new law that allows you to pay for a new computer, software, and even Internet access with the tax-free earnings in your Coverdell ESA. That's right, as long as you have a child in any grade Kindergarten through 12th, you may take tax-free withdrawals from your ESA to pay for all that stuff.

And the computer doesn't have to stay in the beneficiary's bedroom. As long as the child turns it on once in a while, anyone else in your family, including a parent, is permitted to utilize the home technology tools that are purchased with funds from your Coverdell/Gates/Case/Dell ESA. (However, you cannot use the ESA to pay for non-educational software involving games, sports, or hobbies.)

So what do I plan to use my child's ESA-funded computer and RoadRunner access for? Why, day trading in the ESA, of course. Day trading? Hey, college is expensive. If I can beat the 99 in 100 odds that say I will lose my shirt, I may be able to turn that little ESA into four years of Harvard. Best of all, the short-term gains I generate in the ESA won't be eaten up by taxes because the account remains tax-free as long as it is spent for qualifying expenses. (Who cares that I can't write-off investment losses? I'm not planning to lose money.)

The 529 account I now have for my child does not permit me to day-trade. Does that mean I should turn my back on 529? No, not at all. Something tells me I may NOT beat the 99 in 100 odds that my super-active ESA portfolio will fall flat. In that case, my professionally-managed 529 account will come in mighty handy when my kid is ready for college.

On second thought, maybe I should just plan to put my ESA into mutual funds.

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